Thursday March 2

Stocks fell today as potential rate hikes shift back into focus. The S&P 500 fell 0.6% to 2,381 and the Dow Jones fell 0.5% to 21,002. The KBW Bank index lost 2.1% even as rates sold off again while utilities rose 0.8%. Economic data today showed that jobless claims came in significantly below consensus at 223k. Also important to note was Snap’s IPO which priced above the IPO price of $17 and popped to $24 at the open. After Trump’s optimistic and cooperative speech on Tuesdays investors still wait for more details on tax reform. Also important was comments made by Lael Brainard last night which said that higher rates :will likely be appropriate soon” which echoes other hawkish comments made this week by Robert Kaplan, Patrick Harker, John Williams, and James Bullard. Tomorrow Charles Evans, Jeffrey Jacker, Stanley Fischer and Janet Yellen will speak as well. Absent any dovish comments from them investors will be expecting higher rates this month. On that backdrop the two year Treasury yield finished at 1.30%. The ten year Treasury yield rose 3bp to 2.49%. Accordingly 2yr vs 10yr bear steepened to 1.19%. The dollar strengthened against peers across the board especially against EM currencies. USD rose 0.4% against EUR to $1.0507. USD rose 0.6% against JPY to Y114.42. USD rose 0.2% against GBP to $1.2269. Oil prices and the gold are going way down on the stronger dollar and higher rates. Gold prices dropped 1.1% to $1,235. WTI fell 2.3% to $52.62. Brent fell 2.3% to $55.06.

While traders have rapidly shifted their expectations for the upcoming FOMC meeting in March they have been much slower to adjust their expectations for subsequent meetings. The market for Fed funds futures now reflects a 90% probability of higher rates this month according to Bloomberg while CME’s calculations put the probability at 75%. This comes after several FOMC members this week made statements that suggest they are on track to raise interest rates in March barring unforeseen circumstances. The gap between eurodollar futures contracts that expire in March is widening compared to contracts with later expiration dates. This also comes as investors are pricing in higher inflation in the short term than they are in the long term as 10yr – 2yr breakeven rates have dipped below zero which is also a break with recent trends.

In the lead up to France’s presidential elections in April changes in political sentiment are being reflected in the markets. If Marine Le Pen wins the election then that is a big disruption to the status quo and political establishment both in France and the eurozone as a whole. First the spread between France’s and Germany’s 10 year bond yields has blown out reflecting higher risk of default in France. If Le Pen is elected she has said she will plan on dropping out of the euro and converting government debt out of euro, which rating agencies have said would constitute a default. Spreads have widened from just over 20bp towards the end of last year to 65bp now which is significantly above long term averages. Trading activity has risen significantly in those markets with open interest in French government bond futures rising from just over 200k last year to nearly 700k currently. CDS spreads on French banks have also risen. For BNP Paribas and SocGen CDS spreads have risen from around 84bp at the start of the year to around 91bp currently. Credit Ag’s CDS have risen however are lower than the other two. This comes as French bank share prices have underperformed banks in the euro area, once again with BNP and SocGen underperforming by more than Credit Ag. Investors have also shown interest in hedging against equity volatility in European stocks around the time of the election. However currency markets have not shown that same spike yet.

Shares of Snap Inc. popped on its first day of trading. The IPO price was $17 and shares opened at $24 and closed at $24.48 which is a 44% increase from the IPO price. That gives the company a valuation of $34bn which is larger than Marriott and Target. That compares to IPOs of Twitter, Google, and Netflix which rose 73%, 31% and 12% respectively on their first days of trading. Snap is deemed to be so valuable because it has a good stranglehold on the 18 to 34 year old age demographic which is valuable for advertisers. Daily active users for the company have grown each quarter going all the way back to 2014 from around 45 million at the start to more than 150 million currently. It is burning through cash and posted a net loss of $500mm last year as it spends a lot of money on marketing and data storage. It’s revenue increased 7x in 2016 from the prior year to $405mm and it hopes to hit $1bn in revenue soon. Ongoing concerns include slow user growth, low revenue per user, corporate governance. Given the positive reception it could encourage other tech companies to follow in their footsteps. It also shows that investors were willing to buy in spite of having no voting rights.

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Thursday March 2

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